In early 2021, the usually relatively obscure topic of US equities market structure hit mainstream news headlines. In March, an investing subreddit called r/wallstreetbets triggered a short squeeze in brick-and-mortar video games retailer GameStop’s stock, making it the most highly traded asset in the US. The ensuing “meme stock” frenzy was framed as nothing less than all-out class war, and saw possible conflicts of interest in the practice of payment for order flow wind up on the agenda of the Democrat-led Securities and Exchange Commission.

But US market structure underwent far more profound changes this year—ones that did not make many headlines in the national press, but were nonetheless extremely controversial. In 2021, the commission finalized drastic changes, first proposed in early 2020, to how the US consolidated tapes of market data from equities exchanges will be operated and governed, in a bid to keep pace with the technology used by direct exchange feeds to ensure those using the tapes are not at a competitive disadvantage.

In parallel, the large exchanges, sensing existential threats to their business models, have turned to the courts to put a halt to the SEC’s efforts.

One aspect of these changes is the infrastructure rule, which looked to create a situation where vendors called competing consolidators could emerge to offer customers a range of products built with consolidated equities data. The rule also expanded the data these new, rival Sips could offer, from top-of-book quotes to depth of book, odd lots, auctions, and some regulatory data. The SEC’s idea here was that the exclusive Sips were not keeping pace with the exchanges’ premium proprietary datafeeds, and competition and product differentiation would lower prices and introduce more innovation.

The other aspect of the SEC’s modernization efforts was an order to the self-regulatory organizations, including the larger exchanges, to come up with a plan that would govern this new world of competing consolidators. Behind this order was the intent to streamline the existing three data plans that govern the two exclusive Sips into one, administered by a fully independent third party with no proprietary data conflicts—and governed by SROs—but giving more of a voice to institutional and retail investors and broker-dealers.

The SEC approved the SROs’ plan, now known as the CT Plan, in August this year, firing the starting gun on an aggressive timeline aimed at getting the plan implemented within exactly a year. In short order, the SROs created the plan as a limited liability company, and in early October, the non-SRO voting members that sit on the committee to dilute the large exchanges’ voting power were chosen. The SROs, however, were granted a stay by a DC court, and the plan is, for the moment at least, suspended.

Hats in the ring 

Meanwhile, as the infrastructure proposal became regulation, vendors in the consolidator space saw a unique business opportunity and began to plan their bids to be competing consolidators. Each had their own unique offering they thought they could bring to the market. Some of these—Exegy, MayStreet, NovaSparks, McKay Brothers among them—spoke to WatersTechnology about these offerings and their plans to throw their hats in the ring as competing consolidators.

McKay, for example, has experience as a telecoms company, providing extreme low-latency microwave bandwidth for trading firms. NovaSparks, a specialist in field-programmable gate array ticker plant and feed handler appliances for ultra-low latency applications, says it could introduce an FPGA-based solution for market data consolidation at the lowest possible latency. In MayStreet’s case, the vendor’s core business is a platform that allows firms to manage their market data; its expertise as a consolidator would be informed by work on an analogous project, as it operates the Midas platform for the SEC.  

These competing consolidator hopefuls began 2021 in a state of uncertainty, however: while they were all enticed by the potential of becoming a competing consolidator, they said they would not be able to build their business plans till they could understand their incomings and outgoings, and they needed to know how much the SROs would be charging for market data, the raw ingredient in their products.

“Everything revolves around how high the new Sips fees redistributed to the exchanges will be. That is the parameter that will make or break this modernization initiative,” Stephan Tyc, co-founder of McKay Brothers and Quincy Data, told WatersTechnology back in March.

Competing consolidators would only be able to determine the price at which they sell these products once they knew what the fee schedule under a new plan for governance of the Sips looked like. “The price will come on top of the fees that the governance committee decides to redistribute to the exchanges. So the competing consolidators must live on the extra margin they make on the price of the Sip, minus the cost of data that is the input needed to create the Sip,” Tyc says.

Under the infrastructure rule, these fees had to be filed by the plans of the exclusive Sips—CTA, CQ and UTP—by November 5, 2021. The filings when they came out dashed the hopes of some competing consolidators that the exchanges would part with their data on what the vendors considered favorable terms (some had even dared hope for wholesale pricing to be applied).

The filings proposed pricing for three categories of data—Level 1 core data, including top-of-book and odd-lot information; depth of book; and auction information—for professional and non-professional subscribers. To determine the value of depth-of-book data, the operating committees reviewed the exchanges’ charges for their proprietary feeds, comparing what consumers pay for five levels of depth versus full depth, and came up with a multiplier of 3.94. That ratio is applied in the amendments to various professional subscriber fees.

NovaSparks CEO Luc Burgun says the proposed fee schedule essentially aligned Sip depth-of-book pricing with that of the large exchanges’ prop feeds. But direct feeds are more valuable than the Sip, he says: Not only do the proprietary feeds offer more than five levels, they aren’t aggregated, offering a view of all levels for different markets.

“It’s a lot more information and for a market maker, that’s more valuable,” Burgun says. “So if the price is more or less the same, a market maker will keep using the direct feeds, and there is no point in its using the Sip. Which means that it’s way too expensive for what it is.”

With the Sip data priced at that level and the extra fees that a competing consolidator must charge to cover its own costs, it’s difficult to see how a competing consolidator could offer competitively priced products, Burgun added. He says that from his perspective, the filings were “unworkable”, but added that he saw them as the opening of negotiations.

Exchanges block plans 

Some in the competing consolidator community might have seen these filings as a straightforward play by the large exchanges to protect their proprietary data feeds business, using their heft on the Sips operating committees, where they have most of the voting power, to push through an unpopular amendment.

Indeed, an extraordinary footnote in the filings makes it clear that the smaller exchanges—IEX, Memx, LTSE, and Miax—as well as the Financial Industry Regulatory Authority (Finra), while they are participants in the operating committees that submitted these filings, are not on board with them. The footnote says that these parties, and Nasdaq BX, withheld their votes and their advisors “believe that Sip data content fees should be universally lower to align with the uncoupling of Sip data content from the Sip exclusive processor, a function to be performed by competing consolidators. The advisors believe that while their input was important in the process, the core principle of fees being fair and reasonable was not achieved.”

Memx even filed a comment letter with the SEC a few days after the fee filings came out saying that it disagreed with the amendments, which fail to provide fair and reasonable fees for market data, and would reduce the incentive for competing consolidators to enter the market.

The competing consolidator regime and the new governance plan represent a threat to the SROs’ businesses, and the large exchanges have tried to block both the infrastructure rule and the CT Plan in court. The large exchanges say that the Sips hardly need modernizing, as a lot of work was put into them to make them faster. They have argued that the SEC doesn’t have the authority to order them to create the CT Plan, and that the SEC’s modernization efforts amount to appropriation of exchange data and intellectual property.

A lawyer for Nasdaq argued in the DC Circuit Court back in April that Congress gave the SROs more authority over the NMS plan as a kind of quid pro quo, as they are subject to unique obligations, like investor protection and direct SEC oversight. Gibson Dunn partner Thomas Hungar said the commission has failed to prove that harm has occurred as a result of the dominance of the exchanges on the Sip operating committees.

The SROs asked the SEC to stay the CT Plan pending final rulings on this case, but the SEC denied the request in September. In mid-October, however, judges ordered that the plan be stayed. Briefs in the case had to be filed by mid-November, and proceedings will begin in January 2022. If the courts side with the SROs, the plan will be scuppered.

Industry observers have told WatersTechnology the SROs’ court actions are to be expected. They have a history of successfully blocking the commission in court—such as over the transaction fee pilot back in 2019. But also, the pace at which the commission has enacted the modernization initiative—from the relatively less controversial changes like the addition of odd lots to the tape, to more existentially threatening ones like the formation of the CT Plan—hasn’t given the large exchanges much time to plan for and reflect on the profound effects this will have on their businesses, some say; the courts might be the only place they feel they can get a fair hearing.

In a motion for a stay on the CT Plan pending other litigation, lawyers said the SROs would suffer immediate irreparable harm, noting that the SECs “aggressive implementation timeline” requires them to operationalize the CT Plan in just one year, imposing significant costs on the SROs—including those associated with selecting and onboarding the plan’s administrator to renegotiating market data contracts with tens of thousands of subscribers.  

Market data administrator

The competing consolidators will be awaiting the outcome of the court action and the outcome of negotiations, as Burgun puts it, over the fee filings.

But they’re not the only vendors who will be watching this space with interest. Other companies are interested in administering the CT Plan that would govern the market data system in which the competing consolidators would operate.

Licensing, sales, and e-commerce platform DataBP and management consultancy Jordan & Jordan both told WatersTechnology in October they would be interested in bidding for this role.

The administrator could have an even more profound impact on market data pricing and accessibility for consumers than competing consolidators by easing burdensome licensing, billing and audit functions, these vendors say. The commission seems to see the administrator performing the mundane business tasks of the LLC: tax and financial reports, administering market data contracts with vendors and subscribers, and recordkeeping, among other functions.  

Mark Schaedel, strategy advisor to DataBP, told WatersTechnology back in October that the vendor sees in the administrator role an opportunity to accelerate its own mission. “The community of exchanges we are working with is starting to work together on business model innovation opportunities, leveraging our platform to adopt best practice and more convention,” Schaedel says. “The US tape administrator role has interesting potential to put many of these ideas into practice and improve the efficiency of the administrative processes that often frustrate market data users and vendors.”

DataBP supports exchange groups with its e-commerce platform, providing managed services to support clients’ market data administrator operations.

Schaedel says that whoever is selected as administrator can improve the market data experience for consumers by automating and applying modern techniques to enable the sharing of information between market data subscribers, vendors, service providers, and the administrator. Market participants have long complained that data licensing and audit processes are burdensome and expensive; Schaedel says the administrator could mitigate this expense in the context of the Sips by facilitating the sharing of the same records. It could use self-service tools and APIs to connect, communicate and standardize the information being exchanged, rather than having all parties rely on a web of emails, forms, files, spreadsheets and even faxes.   

Barry Raskin, managing director of Jordan & Jordan, agrees there is scope for the administrator to modernize NMS data distribution. “Technology has changed. The software, the types of data crunching that need to be done—this has all gone through major improvements over the years, if you think about what people are doing in big data and AI. We can start looking to build a better mousetrap now that we have the opportunity and the toolkit.”

However, details of many crucial considerations for the CT Plan administrator role—what its duties will be, how exactly the system it is going to govern will work—are still murky, partly because of the ongoing litigation. The administrator is to be chosen in an RFP process run by the plan LLC, but this is all on hold pending the outcome of the stay. So whoever winds up with the role will have to adapt quickly to an evolving situation.

For one thing, it’s still unclear what the new market data system will look like. Manisha Kimmel, chief policy officer at data infrastructure provider MayStreet and a former senior policy advisor for regulatory reporting at the SEC says the exclusive Sips will continue to operate under the three plans until the CT Plan is fully operational, at which point they will come under the CT Plan and co-exist with the competing consolidators. Schaedel says many questions surround the contract structure under the future Sips regime.

“It’s still not clear from the CT Plan: Will we maintain Tape A, B and C [UTP, CQ and CTA]? Or is it just one tape? Will the new elements of market depth and odd lots be offered discretely like trades and quotes are offered today, or will it be one package of products? And then do we have one contract for these tape products? And how will the transition to the new contract structure be managed?” Schaedel says.  

As Kimmel told WatersTechnology: “Regardless of how things shake out, you will need an administrator that can handle complexity.” 

Kimmel was referring to those vendors looking to become administrators, but as 2022 begins and more details unfold of the future of the SEC’s modernization efforts, her words could apply to the consolidators, exchanges, vendors, and regulators alike who will be watching for how the situation evolves.